PRAISE FORTUNE LTD v. ALEGANA ENTERPRISES LTD

HCA 858/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 858 OF 2017

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REASONS FOR DECISION

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1.  On 21 April 2017, I continued until further order the ex parte injunction granted by Madam Justice Au-Yeung on 10 April 2017, prohibiting and restraining the defendant from in any way disposing of or dealing with any of the 230,000,000 and 75,000,000 ordinary shares (“Shares”) in Pan Asia Environmental Protection Group Limited (“Company”) registered in the name of the plaintiff and deposited in account No.600658 operated by China Times Securities Limited (“China Times”) and in account No.90200051 operated by Resources Securities Limited (“Resources Securities”) respectively on 28 February 2017, except in accordance with the instructions or consent of the plaintiff (“Injunction”).

2.  I so ordered for the following reasons.

Principles governing grant of interlocutory injunctions

3.  In deciding whether it is just or convenient to grant an interlocutory injunction, the court asks the following questions:

(1) whether there is a serious question to be tried;

(2) if so, whether, if the plaintiff were to succeed in obtaining a permanent injunction at trial, it could adequately be compensated by an award of damages in respect of any loss which it might suffer by reason of the defendant continuing to act unrestrained pending the trial;

(3) if not, whether the defendant would be adequately protected by the plaintiff’s cross-undertaking in damages should it be later found that the plaintiff should not have been granted an interlocutory injunction; and

(4) if there is doubt as to the adequacy of the respective remedies of damages, where the balance of convenience lies.

See American Cyanamid Co v Eithicon Ltd [1975] AC 396, per Lord Diplock at 407F-409D as explained by the Hong Kong Court of Appeal in Wah Nam Holdings Co Ltd v Excel Noble Development Ltd [2000] 3 HKC 118, per Ribeiro JA (as he then was) at [28]-[32].

Serious question to be tried

4.  The requirement of “serious question to be tried” means that the claim must not be frivolous or vexatious: American Cyanamid Co at 407G-H.

5.  On the evidence, the plaintiff has plainly passed this threshold.  Indeed, it has demonstrated a very serious claim to the return of the Shares arising from the following circumstances:

(1) The plaintiff agreed to pledge to the defendant, and transferred to the said China Times and Resources Securities accounts, the Shares as collateral in return for a loan to a value of 43% against the fair market value of the Shares (“Loan”) under (a) a Loan Agreement and a Pledge Agreement signed on 1 November 2016 between the plaintiff and the defendant (“Loan Agreement” and “Pledge Agreement” respectively); (b) a Collateral Agency Agreement dated 3 February 2017 between the plaintiff, the defendant and China Times; and (c) a Tri Party Control Agreement dated 26 September 2016 between the plaintiff, the defendant and Resources Securities.

(2) The first tranche of the Loan in the amount of HK$53,000,000 was advanced by the defendant to the plaintiff and the Shares[1] were transferred into the said China Times and Resources Securities accounts on 28 February 2017.

(3) Notwithstanding the prohibition against prepayment of the Loan within the first 12 months in clause 2.8 of the Loan Agreement, for reasons to be set out in paragraph 9 below, by an email dated 6 March 2017 from the plaintiff’s Raymond Lai (“Lai”) to the defendant’s John Zorbas (“Zorbas”), the plaintiff informed the defendant that it had decided to “terminate this loan arrangement” and asked the defendant to advise the relevant procedure and costs.

(4) In response, by an email dated 7 March 2017 from Zorbas to Lai, the defendant expressed disappointment with the plaintiff’s decision but (a) advised the plaintiff that the defendant had stopping funding for the second tranche of the Loan; (b) asked the plaintiff if it would buy from the defendant shares in the Company which the defendant had acquired from the open market after the advance of the Loan in order to support the share price of the Company; and (c) promised to provide the plaintiff with the closing loan statement.

(5) By an email of the same date from Lai to Zorbas, the plaintiff indicated its willingness to consider buying back the Company shares that the defendant had bought and asked for the number of shares in question and the closing loan statement.

(6) Zorbas responded by an email dated 8 March 2017 to Lai, which opened with the following statement: “As per your request below we have terminated your Loan with us.”

(7) After much chasing by the plaintiff, by an email dated 27 March 2017 from Zorbas to Lai, the defendant eventually provided the plaintiff with its termination statement that asked for US$8,559,354.84.

(8) By an email of the same date from Lai to Zorbas, the plaintiff confirmed acceptance of the defendant’s termination statement and the redemption figure of US$8,559,354.84 which the plaintiff proposed to satisfy by payment of an equivalent amount in Hong Kong dollars (i.e. HK$66,335,000) (“Redemption Sum”) through the Central Clearing and Settlement System on DVP terms.  

(9) Thereafter, from 28 to 31 March 2017, the plaintiff kept chasing the defendant, but to no avail, for the arrangements for transfer of the Shares by the defendant’s custodians to the plaintiff’s account with one Caitong International Securities Co Ltd against the payment of the Redemption Sum by the plaintiff.

(10) Against this background, the plaintiff issued the Writ of Summons herein against the defendant on 10 April 2017 praying for, inter alia, a declaration that the Loan Agreement and the Pledge Agreement were terminated on 8 March 2017; a declaration that the plaintiff is entitled to forthwith discharge the Loan by repayment of any outstanding sums (including interest) due to the defendant under the Loan Agreement; and an order that the defendant do forthwith transfer the Shares to the plaintiff upon the discharge and repayment of the Loan.

(11) On the same date, the plaintiff applied for and obtained the Injunction against its undertaking to, inter alia, pay into court in an interest-bearing account a sum of HK$66,335,000 (i.e. the Redemption Sum) by noon on 11 April 2017 (“Payment Undertaking”), in addition to the usual cross-undertaking as to damages.

(12) The Payment Undertaking was duly complied with.

6.  In summary, the material before the court disclosed a meritorious case of termination of the Loan Agreement and Pledge Agreement by consent at the latest by 8 March 2017 whereupon the plaintiff should be entitled to the return of the Shares upon payment of the Redemption Sum, the performance of which is assured by the plaintiff’s compliance with the Payment Undertaking.

Inadequacy of damages to the plaintiff    

7.  The plaintiff’s evidence also persuaded me that, without interlocutory injunctive relief, the plaintiff would be exposed to a risk of loss of the Shares.

8.  Although increased volume of trading in the shares of the Company (which is listed on the Main Board of the Hong Kong Stock Exchange) was recorded from 28 February to 15 March 2017 before trading was suspended on 16 March 2017, the plaintiff was understandably unable to identify from the data available any particular sale involving any of the Shares by the defendant.

9.  Nevertheless, I was prepared to infer a risk of disposal of the Shares by the defendant if unrestrained from the evidence of the unexplained transfer of 230,000,000 of the Shares out of the said China Times account on 1 March 2017 and the subsequent breaking up of such shares into smaller tranches and repeated movements of the same amongst different brokers, even after the defendant had agreed to the termination of the Loan Agreement and the Pledge Agreement and after the suspension of trading on 16 March 2017.  The plaintiff was in fact prompted to initiate the termination of the Loan Agreement and the Pledge Agreement by the share movements prior to 6 March 2017.

10.  As the defendant had exclusive control over the Shares while they were under pledge to it, it would not be unreasonable to attribute these share movements to the defendant.  In fact, Lai’s email dated 6 March 2017 to Zorbas (paragraph 5(3) above) opened as follows: “We noticed that since we transferred the shares to China Times, the shares have been transferred to Standard Chartered Bank and subsequently to Citibank.  We are greatly troubled by such move and this has put a grave concern to us.”  Zorbas’ reply email sent on the next day (paragraph 5(4) above) did not deny that the Shares lodged with China Times had been moved or give any reasons for such move to allay the plaintiff’s concern.

11.  Even allowing for the fact that the defendant did enjoy certain rights to deal with the Shares during the currency of the Loan Agreement,[2] any further dealings with the Shares behind the plaintiff’s back after the termination agreement, especially after the plaintiff had agreed to pay the Redemption Sum, would naturally arouse suspicion.  The fact that the plaintiff had to chase the defendant by repeated emails and WhatsApp messages for the amount of the Redemption Sum for many days and the defendant’s refusal / failure thereafter to confirm the arrangements for the transfer back of the Shares to the plaintiff did not inspire confidence either.  For the sake of completeness, the defendant did mention a number of times in the correspondence that trading in the shares of the Company had to be resumed to allow the transfer back to China Times.  However, this did not sit well with the fact that the defendant was able to move the Shares around off market without going through the trading floor of the Stock Exchange even after 16 March 2017.  In light of these events, plaintiff’s worry that the defendant might sell or otherwise dispose of the Shares was not groundless.

12.  According to paragraphs 2.1(3) and 4.6(2) of the 1^st Affirmation dated 5 April 2017 of Qian Yuanying, the plaintiff’s shareholder and director, as at 5 April 2017, the Company has issued 840,000,000 ordinary shares so that the Shares represent a 37% shareholding in the Company and trading in the shares of the Company closed at HK$1.24 per share on 28 February 2017 so that the Shares had a market value of about HK$378 million when they were pledged to the defendant and transferred to the said accounts with China Times and Resources Securities.

13.  Should the Shares be disposed of by the defendant in the interim, it is firstly very doubtful whether the plaintiff would be able to re-acquire such a sizable holding of shares in the Company in the market. Secondly, such acquisition may trigger the requirement of making a mandatory general offer under rule 26 of the Takeovers Code. 

14.  In these circumstances, there is an appreciable risk that the plaintiff would not be adequately compensated by an award of damages if the Shares could not be returned to it.  See Wongs Investment Development Holdings Group Limited (in liquidation) v China Kingstone Mining Holdings Limited, HCMP 1472/2015, unreported, 8 July 2015, per G Lam J at [24].

15.  While on the adequacy of damages to the plaintiff, I was also mindful that very little was known about the defendant save that it was incorporated in Cyprus and used an address in Toronto, Canada.  According to the plaintiff, the defendant was not known to have any physical presence, place of business, telephone or fax lines or employees in Hong Kong.  Damages may be an illusory remedy if there is any doubt about the defendant’s ability to pay damages (Union (V-Tex) Shirt Factory Ltd (in liquidation) v Union V-Tex Realty Ltd [1985] 2 HKC 617 and Yeko Trading Ltd v Chow Sai Cheong Tony [2000] 2 HKC 612).

Adequate protection of defendant by plaintiff’s undertaking in damages

16.  In contrast, upon the termination of the Loan Agreement and Pledge Agreement, the defendant’s only interest should be in receiving the Redemption Sum, which has been sitting in court and therefore secured.

17.  The adequacy of damages to the defendant should not be an issue at all.

[1] The number of shares transferred by the plaintiff to the said Resources Securities account were 126,568,000 but only 75,000,000 of those shares were subject to the pledge.  

[2] Clause 3.1 of the Loan Agreement.